What Does Lapse Mean in Life Insurance?

Life insurance provides financial protection, but its effectiveness relies on keeping the policy active. Understanding what happens when a policy is no longer in force is important for policyholders. A life insurance policy can cease to be active if certain conditions are not met, leading to a situation known as a lapse.

What is a Policy Lapse?

A life insurance policy lapses when the policyholder fails to meet specific contractual obligations, primarily the payment of required premiums. This terminates the insurance coverage. Once a policy lapses, the insurance company is no longer obligated to pay out a death benefit to beneficiaries if the insured person passes away.

A policy that is “in force” means it is active and providing coverage, while a “lapsed” policy has lost this status. This situation can have considerable consequences for both the insured individual and their intended beneficiaries.

Common Causes of Lapse

The most frequent reason a life insurance policy lapses is non-payment of premiums. Policyholders might fail to make these payments due to financial difficulties, simple forgetfulness, or administrative issues like missed notifications.

For certain types of permanent life insurance policies, like whole life or universal life, a lapse can also occur if the policy’s accumulated cash value is exhausted. This can happen if policy loans or withdrawals deplete the cash value to a point where it can no longer cover policy charges and expenses.

The Grace Period

When a premium payment is missed, a life insurance policy does not immediately lapse; instead, it enters a grace period. This timeframe, typically 30 days from the premium due date, allows the policy to remain active despite the missed payment. The purpose of this period is to provide a buffer, allowing the policyholder to make the overdue payment without losing coverage.

If the premium is paid in full within this grace period, the policy continues without interruption. However, if the payment is not received by the end of the grace period, the policy will officially lapse. Should the insured pass away during the grace period, the death benefit would typically still be paid, though any unpaid premium might be deducted from the payout.

Immediate Consequences of Policy Lapse

The primary and most significant consequence of a life insurance policy lapse is the immediate loss of all insurance coverage. If the insured dies after the policy has lapsed, beneficiaries will not receive the death benefit.

For policies that have accumulated cash value, a lapse can result in the forfeiture or loss of access to these accumulated funds. Surrender charges may also apply if the policyholder attempts to access any remaining cash value after a lapse. Additionally, any outstanding policy loans taken against the cash value may become immediately due and payable, and in some cases, a lapse can trigger tax implications.

Reinstating a Lapsed Policy

It is often possible to reinstate a lapsed life insurance policy, restoring it to active status. The process typically requires the policyholder to pay all overdue premiums, often with accrued interest, and repay any outstanding policy loans.

Reinstatement requires providing evidence of insurability, which may involve a health questionnaire or a new medical examination, similar to when the policy was first applied for. Insurers generally allow reinstatement for three to five years after the policy has lapsed. However, reinstatement is not guaranteed and is subject to the insurer’s approval, especially if there have been significant changes to the insured’s health.